Gig economy regulations are ‘more than priced’ into stocks, analyst says

Fox Advisors Founder & CEO Steven Fox joins Yahoo Finance Live to discuss the Biden administration's proposal of change to the classification of gig workers, how this will affect Uber and Lyft, regulatory concerns, and the outlook for rideshare companies.

Video Transcript

BRIAN SOZZI: Shares of Uber and Lyft and DoorDash are back on the rides today after getting slammed on Tuesday after the Biden administration proposed a change to the classification of gig workers that could revise them from independent contractors to employees. Fox Advisors founder and CEO Steven Fox joins us now for some analysis on this. Steven, has this now been priced in any potential change that may come in the first half of next year? Is it now fully priced into these stocks?

STEVEN FOX: You know, actually, I think it's more than priced into the stocks. I think regulatory concerns have been sort of the hand-wringing events since these companies went public. And what we've seen is that the companies have been able to manage through these events, and actually, continue to improve their business model. So I think it's being overdone at this point.

BRAD SMITH: Lyft has said nothing is immediately going to change about its business model just yet. And of course, that's what the company would say, given the fact that, yeah, there's still a lot of discussion that has to take place in the near term in order to see any type of reclassification go forward. But what extent should customers at the end of the day, if this does move forward, expect their prices, their fares, to also have to be adjusted?

STEVEN FOX: Yeah, that's a great point because all the companies, obviously, could still raise prices to offset any higher costs. I think it's also important to keep in mind that what happens at the federal level is independent of what happens at the state level. So companies have been in discussions with various states.

I think the most encouraging thing you saw was out of the state of Washington this year, which signed into law an independent contractor plus agreement, which basically allows for some benefits. Sort of this IC plus gives the drivers flexibility, plus benefits. And the companies are working to pass those costs through to customers, and also reducing other costs tied to other pieces of the business to offset some higher costs as well.

JULIE HYMAN: Steven, as we potentially go into recession, what effect will that have on the sort of driver service dynamic? In other words, could there potentially be more people who are available to be drivers, unfortunately, if there are layoffs? Or do Uber and Lyft get away with paying them less? Like, how is-- what are going to be all those knock-on effects?

STEVEN FOX: Yeah, I don't think Uber and Lyft get away with paying them less, especially in this political environment. And I don't think they're looking to pay them less. I think if you go back and look what the companies have done-- forget about what they've said, but what they've done for their drivers specifically over the last couple of years, they've worked to make their expenses come down through various methods. They've also worked to make their time on the network much more efficient. Obviously, if they're sitting around waiting for a ride, that's not as efficient.

So it's really important to step back and say, OK, in a weaker economy, how dependent has the consumer become on these rideshare opportunities, whether to drive or also to ride? And how do the network utilization rates look? On top of that, the real untapped market is still the enterprise. So large companies with multiple pockets of spending on transportation and food delivery, as they consolidate those things, those are real profitable opportunities for Lyft and Uber that they can also translate into their drivers to make money.

BRAD SMITH: Right, a lot of focus on driver utilization to make it more incentivized in order for drivers to actually want to be on the platform and be able to take advantage of more rides. But then there's also the thought of, if this goes through, and that changes the classification, does that actually make it more intriguing for new drivers to sign up and increase the supply side of this broader kind of supply demand equation that ultimately has a major-- kind of a major delta on prices here for consumers?

STEVEN FOX: Yeah, so one of the interesting things that I think Wall Street doesn't appreciate enough is that when you talk about these networks, the companies aren't playing checkers. It's more like three-dimensional chess. So when you look at supply versus demand, like take the UK, for instance, where Uber is now providing benefits to the drivers while giving them flexibility, their costs have gone up. But then other costs have gone down in terms of actual providing. Looking at driver incentives, for example. They don't have to provide as many.

And so they're attracting probably more drivers now, passing on some of the costs to their customers, but competition has followed. So you're getting a little bit of that network benefit, I think. How it plays out in the US is going to be on a region by region basis. But generally speaking, I think the companies have a way to manage through this and continue to march towards EBITDA goals where they've been set, like at Lyft and Uber.

BRAD SMITH: Fox Advisors founder and CEO Steven Fox, thanks so much for the time today, Steve.